Dave Larock in Interest Rate Update, Mortgages and Finances
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The U.S. Federal Reserve has sounded increasingly hawkish of late, with its members repeatedly raising the prospect of a rate hike in either September or December of this year. Tough talk from the Fed is nothing new, but there may be some new thinking behind it now (more on that in a minute).
The Fed’s rate-increase rhetoric has been primarily attributed to improvements in the U.S. employment data, so all eyes were on the latest U.S. non-farm payroll report last week as investors tried to gauge how the U.S. labour market’s current momentum might affect the Fed’s tightening timetable.
The latest data proved disappointing. The headline number came in well below consensus expectations and the details showed that momentum in the most cyclically sensitive parts of the U.S. labour market has continued to slow.
Here are the key details from the latest U.S. non-farm payroll report:
Bluntly put, if you’re an investor using the latest U.S. employment data as a gauge for when the Fed will next raise its policy rate, the August data should have you moving out your rate-hike timetable. But what if the Fed has finally come to the conclusion that monetary policy can’t influence the labour market as much as it had hoped? And what if the Fed’s members are finally becoming more worried about the negative side effects of its ultra-loose monetary policy?
Any rational policy maker has to acknowledge that there is a significant and growing cost to keeping rates so close to 0%. Here are some of the key factors that support this view:
The Fed continues to say that its path will be “data dependent” and focused on its dual mandate of preserving price stability and promoting employment growth. But if it raises its policy rate in 2016, it is unlikely that it will do so because the employment data confirmed that it was time. Instead, the Fed may finally be reconciled to the fact that it has kept policy too loose for too long, and that the costs of not raising its policy rate outweigh any incremental benefits.
As for the risks of raising rates in a low-growth, low-inflation environment with an economy in the midst of a still fragile labour-market recovery, we might well be learning more about that scenario sooner than we think.
Five-year Government of Canada bond yields fell four basis points last week, closing at 0.69% on Friday. Five-year fixed-rate mortgages are available in the 2.29% to 2.39% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at about 2.49%.
Five-year variable-rate mortgages are available in the prime minus 0.40% to prime minus 0.50% range, which translates into rates of 2.20% to 2.30% using today’s prime rate of 2.70%.
The Bottom Line: The latest U.S. non-farm payroll report came in weaker than expected and, if the Fed is still focussing on the health of the labour market, it should be less likely to raise rates in 2016. But if the Fed now believes that it has kept rates too low for too long, we may see a U.S. rate rise in 2016 after all. While I am not betting on that outcome at this time, it could happen. That would lead to a short-term spike in our bond yields, and by association, our fixed mortgage rates. Stay tuned.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog, Move Smartly, and on his own blog: integratedmortgageplanners.com/blog Email Dave